The number of customers seeking to switch electricity suppliers has jumped in NSW amid an onslaught of advertising and discounted offers, triggering warnings of a price war as
AGL Energy
,
Origin Energy
and
TRUenergy
battle for market share.

The rate of customer churn has raced ahead since the completion of the $5.3 billion NSW power privatisation, while sharp increases in regulated tariffs due to take effect on July 1 are expected to accelerate the trend.

Most vulnerable, according to analysts, are Origin and Hong Kong-owned TRUenergy, which forked out up to $1280 per customer to buy the NSW state-owned retailers. While their successful acquisitions turned them into the market leaders in what is the country’s single largest consumer market, they are also the most vulnerable to losing customers to the now third-placed AGL, which has embarked on an aggressive customer poaching strategy.

“AGL has been having a field day," says Ben Polis, who claims his company, EnergyWatch, is collecting customers in NSW at a rate of 100,000 per year, mostly from Origin Energy, to channel to AGL.

“Origin and TRU didn’t realise AGL was going to hit the market so hard. They didn’t have a marketing strategy to retain customers," said Mr Polis, who expects the rate of switching to surge in June as a result of advertising campaigns ahead of the July 1 tariff rises.

Official rates of customer churn from the Australian Energy Market Operator confirm turnover rates have picked up in recent months. The full effect of the accelerated switching has yet to be felt because it takes up to 90 days to transfer a customer account from one retailer to another.

About 170,000 customers registered to switch retailer in the first four months of the year, up 44 per cent on a year earlier. That indicates about 450,000 customers will switch this year, given about 90 per cent of those who register actually change, according to Credit Suisse.

But Origin and TRUenergy deny they are suffering large customer losses, or that they have no retention strategy for accounts they acquired through the acquisitions of Country Energy and Integral Energy, and EnergyAustralia, respectively.

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TRUenergy has added customers since it acquired EnergyAustralia with its 1.5 million accounts, says spokesman Carl Kitchen.

“We always expected increased competition in NSW," he said. “Victoria has the highest churn rates in the world and is considered the most competitive market internationally, so we have had experience with it."

Origin underlines its broader and more strategic offering of products to customers and says it doesn’t just compete on price. The customers it acquired through Country Energy have historically been “stickier", and hence more valuable, it argues.

EnergyWatch, and online comparison sites such as GoSwitch and Switchwise, have helped facilitate churn, often enabling households to switch easily from a full-priced default rate to a rival’s discounted contract.

Discounts of 10 per cent are now typical, more than triple the typical 3 per cent on offer a year ago, says GoSwitch chief Ben Freund.

While customers stand to benefit, the fierce competition means sales tactics “can become quite aggressive", he says, with not all sales services being as impartial as customers may believe.

Many of the services will have preferred suppliers to channel customers to for a commission, effectively acting as agents.

As competition picks up, retailers are expected to start offering their existing customers the same discounts to prevent defections.

“It’s not in an incumbent retailer’s best interest to get their entire customer base to get a discount," Mr Polis says.

“They will only give a 10 per cent discount when someone else in the market has contacted their customer, for retention. Incumbents are trying to keep their customers on the highest rate and their churn rates as low as possible."

Low wholesale power prices in NSW have so far protected retail margins even as competition has picked up, with smaller companies such as Australian Power & Gas and Lumo Energy gaining ground. West Australian retailer
Alinta
wants to treble its customer base in the eastern states to 1.5 million within five years.

But Standard & Poor’s warns that operating retail margins, and therefore profitability, are at risk of weakening at least in the short term for all the retailers as the competition intensifies.

“By taking such an aggressive approach to acquiring customers, we consider that there is some risk that AGL Energy sparks a price war that leads to a race to the bottom as the incumbents [Origin Energy and TRUenergy] seek to defend market shares," S&P said last week.

Merrill Lynch has similarly warned of softer retail EBIT margins for AGL and Origin in the short term, estimating that margins will slide by 0.4 of a percentage point over the next three years.

Both S&P and Merrill Lynch agree the squeeze in margins will be temporary as retailers later switch their focus to maximising margins rather than gaining or defending market share.

All the same, experience in Victoria signals that competition levels will not fade, Mr Freund says. “This is only the beginning. This is not going to be settled in 2011; this will be a feature of NSW for quite a few years."